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Loan Amortization Plan: How is it calculated?

Loan amortization plan: how to calculate

When analyzing a loan, the amortization plan is a fundamental factor since it indicates the repayment methods and the relative timing for the repayment installments. But how do you calculate the amortization schedule?

The amortization plan calculation allows you to evaluate the actual feasibility of a loan before applying for it. This is because the amortization schedule shows all the information related to the loan repayment.

The loan market currently has different types of amortization plans, each with different repayment methods. However in Italy the most used calculation method is the one called “French”. In this article, therefore, we will deepen the calculation of the amortization plan by referring to this type of repayment.

How the French amortization plan works

As already mentioned, the amortization plan defines both the timing and the methods for the payment of the loan repayment installments. Installments with an amount defined on the basis of the interest rate applied to the loan.

In this regard, we remind you that the amortization installments consist of two distinct portions: principal and interest. The first corresponds to the capital lent by the lending bank. The interest portion, on the other hand, concerns the sums due as interest, defined on the basis of the rate applied to the loan.

The composition of the installments may change according to the type of amortization plan applied. Specifically, French amortization is a two-step debt settlement program.

In the first phase, the periodic installment is mainly composed of the interest portion. This will decrease over the months, with a simultaneous increase in the share capital. In the final phase of the contract, on the other hand, it will be the principal amount that constitutes the majority of the repayment installment.

Amortization plan online calculation

However, what has just been said does not mean that the amortization installments have a variable amount. The beneficiary must always pay the same amount monthly. The only difference is represented by the percentage of interest and capital shares that make up the installment.

In short, therefore, by opting for a loan with French amortization, the creditor ensures that the customer repays the interest first and then the loaned capital.

We remind you that for the purpose of determining the installment amount, the interest rate is also a determining variable. Those who opt for a fixed rate loan are sure of a repayment with constant payments. Those who choose variable rate loans instead are subject to the effects of market changes.

How to do the amortization plan calculation? As we have seen, there are several factors to consider when calculating the loan amortization schedule. This operation is often difficult for those who are not experts in financing.

Those who wish to calculate the depreciation plan despite not having particular skills can resort to special online services. On the Net there are in fact several calculators that allow you to simulate the amortization of a loan simply by entering some essential data (rate, duration, amount, etc.).